Fed's Greenspan Doubts 'Housing Bubble' Thesis

Alan Greenspan said Thursday concerns that a U.S. "housing bubble" is inflating are overblown, even though there is evidence of price misalignment in some areas. The Fed chairman also repeated his critical view of the federal budget gap.

In prepared remarks for a conference organized by the Chicago Federal Reserve, Greenspan said rising interest rates would probably result only in a "softening" of real estate values, not a selloff.

"A number of analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode," Greenspan said. "Their concern is that, if this were to occur, highly leveraged homeowners will be forced to sharply curtail their spending.

"To be sure, indexes of house prices based on repeat sales of existing homes have outstripped increases in rents, suggesting at least the possibility of price misalignment in some housing markets. A softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates.

"But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much," Greenspan said.

Greenspan was also relatively sanguine on the trade deficit and the amount of debt being carried by companies. He again raised red flags, however, about the country's federal budget gap.

"The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our yawning fiscal deficit," he said, repeating the essence of warnings he's issued in the past. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances."

"One issue that concerns most analysts, especially in the context of a widening structural federal deficit, is inadequate national saving," Greenspan said. "Fortunately, our meager domestic savings, and those attracted from abroad, are being very effectively invested in domestic capital assets. The efficiency of our capital stock thus has been an important offset to what, by any standard, has been an exceptionally low domestic saving rate in the United States."